Confidential | Ardent Capital
Start-Up
Financing
Asia Pacific
Trends 101
and Intelligence
Adrian Vanzyl
July 2013
Will Matthews
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About Ardent Capital
We are an Operator Venture Capital Firm
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Headquartered in Bangkok, offices in Singapore
Not a traditional fund – no carry, no management fee, no fixed size or lifespan
Focus on ecommerce companies, B2C and platforms supporting commerce
Invest only across Southeast Asia
And only where management team is in SEA
And only where primary customer base is in SEA
Venture side of Ardent
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Confidential | Ardent Capital
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Labs side of Ardent
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Seed and early stage
5 investments so far, including into E27
We build a company inside of Ardent
aCommerce as example – full backend logistics and fulfillment, 80 staff in our Bangkok
office
Founded by the entrepreneurs behind Ensogo (sold to LivingSocial), Admax (sold to
Komli) and NewmediaEdge (sold to STW)
Investors include founding team, plus Japanese investors (Recruit.co.jp and GMOvp.com), US investors (Siemervc.com), and several regional angels.
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About Adrian Vanzyl
CEO and co-founder of Ardent
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Educated in Australia
AU 1995, CTO of Sausage Software (HotDog), IPO on ASX
USA 1997, CTO of LookSmart, IPO on Nasdaq
USA 1999, VP Bizdev LinkExhange, sold to Microsoft
USA 2000 onwards, CTO Blumberg Capital, $100M early stage VC in SF
Confidential | Ardent Capital
– CEO of two portfolio companies
– Over 70 investments, including Hootsuite, Nutanix
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Thailand, end 2011 onwards, CEO Ardent Capital
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MD by training (Monash University, MB BS)
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I love technology, the internet, entrepreneurs, investing and building stuff.
Have personally invested in about 30 companies
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How to Fund Your Start-Up?
There are essentially two different types of business financing
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Debt Financing
– You borrow the money and agree to pay it back in a particular time frame at a
set interest rate
– You owe the money whether your start-up succeeds or not
Confidential | Ardent Capital
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Equity Financing
– You sell partial ownership of your company in exchange for cash
• Equity = Stock or any other security representing an ownership interest
– The investors assume all (or most) of the risk
• If the company fails, the investors lose their money
• If the company succeeds, the investors typically make much greater return
on their investment than interest rate (“higher risk higher returns”)
– Because investors take on a much higher risk than lenders, they are typically
far more involved in your company
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Which Type of Financing is Best?
There are many types of investment vehicles depending on your
objectives and the stages which your start-up is in
Common
Shares/ Equity
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Preferred
Shares
Convertible
Equity
Convertible
Debt
Debt
(e.g. Bank
Loans)
Founder
Equity/Shares
Equity
Debt
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Common Stock/Common Shares
Common Stock is a form of equity ownership and gives the right to its
owner to share in the profits of the company
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Common shares should be contrasted with Founder Shares and Preference shares
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Also known as "ordinary shares“
Can be “voting” or “non-voting”
– A voting share is a share of stock with the right to vote on certain corporate
policies
– Complex cap table situations (hundred small shareholders is a problem)
Common stockholders have a residual claim to the income and assets of the
business
– In the event of liquidation, common shareholders have rights to a company's
assets only after bondholders, preferred shareholders and other debt holders
have been paid in full
Confidential | Ardent Capital
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Founder Equity/ Founder Shares
Even before seeking outside financing, founders must agree on how to
split initial ownership
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Founder Equity or Founder Shares are simply common stock
– Typically allocated and committed, but not really issued until the time of startup
incorporation
– Usually follow a vesting schedule but may start vesting before the issuance of
founders’ stock or even prior to the date of incorporation of the company
– This vesting is balanced by investors’ desire to keep the founders committed to
the company over the long term
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– Investors typically insist on a 3-4 year vesting period, in equal monthly
increments. This is to reduce the risk of a founder leaving early.
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ESOP
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Employee Stock Options
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It is an option to buy, not an actual share
Employees get options “for free”
Critical to motivate and retain staff
Cliff – typically one year
Vesting schedule – 3 to 4 years
15-30% of the company. Why so much
Separate from Founders shares, but Founders shares can also vest
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Strike price
Exercise
Acceleration
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Can make your employees rich
Critical for building the ecosystem
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Preferred Shares
Venture capitalists and other early stage investors typically invest in
startups through preferred shares
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Confidential | Ardent Capital
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Preferred stock is a class of stock that provides certain rights, privileges, and
preferences to investors
– Examples of such preferential rights include
• dividend payment preferences
• liquidation preferences
• redemption rights
• voting rights
Preferred stock entitle the holders to certain rights senior to those of common
stockholders
Senior to the common stock in the event of a sale of the business
– Preferred equity holders get paid at least their money back before the common
shareholders (downside protection)
This is one way in which the investors can protect their interests
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Convertible Debt, or Convertible Note
A type of debt that the holder can convert into a specified number of
shares of common stock in the issuing company
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Typically the way the debt will be converted into shares is specified at the time the
loan is made
Converts on a ‘Qualified Financing’
Converts into same class of shares as the preference investors
Usually there is compensation in the form of a discount
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Discussed next
Sometimes there is a cap on the valuation at which the debt will convert. This is to
protect the investors from a massive increase in valuation
Confidential | Ardent Capital
Why Use Convertible Debt?
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Ability to raise funds while allowing founders to avoid pricing until valuations can be
made on firmer ground
– Advantageous particularly for Friends & Family round
Less dilutive if the company believes its equity will be worth more at a later date
Typically faster than raising a priced round from an institutional venture capital firm
that typically seeks a minimum ownership level
Lower transaction costs (mostly legal fees) when issuing debt vs. equity
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Convertible Debt
Sometimes a discount is offered as a compensation to convertible debt
holders
Discount - Amount of reduction in price the convertible debt holders will get when
they convert in the next round (expressed in terms of a percentage, usually 20% - 25%)
It can also increase over time (eg start at 10%, grow at 2% per month)
Example
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Confidential | Ardent Capital
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An investor invests $100,000 in a startup as a convertible debt
The terms of the note are a 20% discount and automatic conversion after a qualified
financing of $1,000,000.
Assuming the shares were priced at $1.00, the investor can convert the $100,000 debt
to shares at the discount rate of $.80 each (20% discount) instead of the $1.00 price
that other participants in the current funding round will have to pay
That gives the initial investor 125,000 shares for the price of $100,000
Caps can also be added to convertible debt, setting a limit for how much the startup
can raise before the shares stop getting diluted
If the pre-money cap was $5,000,000, you would still get a discount of 20% up to that
amount. If the startup raised at a valuation over $5,000,000, then the investor will
convert at $5M no matter what the actual valuation is
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Convertible Equity
Convertible Equity retains the most popular features of Convertible Debt
but does not saddle startups with debt
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Essentially, Convertible Equity removes the repayment at maturity and interest
provisions of Convertible Debt
Why Use Convertible Equity?
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Confidential | Ardent Capital
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Startups can avoid complex interest-rate calculations and payments that come with
convertible debt
Startups don’t have to worry about investors calling for the debt if the maturity date
rolls around and there has not been a Series A Round
Companies don’t have to artificially carry debt on their books, a potential liability
when seeking a line of credit from a supplier or closing a deal with a large
corporation
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Selling Founders Shares
Buy out some of the Founders’ holding
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An investor buys shares directly from a founder
The money does NOT go into the company
It only goes to the founder
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Founder positives
– Gets some money out
– Reduces day to day stress (can I afford to pay my rent)
Confidential | Ardent Capital
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Company negatives
– Money doesn’t go into company to help it grow
– If too much can demotivate the Founder
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The different stages of equity financing
A typical start up go through multiple rounds of financing, but the
number and type of stages may change based on start up performance
and market conditions
Confidential | Ardent Capital
Idea Stage
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Bootstrapping
Angels
Friends & Family
Incubators
Accelerators
Seed Stage
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Angel Investors
Incubators
Accelerators
Seed Funds
Growth
/Late
Stage
Early Stage
Round
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Institutional
Funding
– Series A
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Institutional
Funding
– Series B
– Series C
IPO
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Why the different stages of financing?
Entrepreneurs often raise capital in multiple rounds of financing so that
they can take advantage of higher pre-money valuations at each
subsequent round
Confidential | Ardent Capital
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Before each equity financing round, there is a valuation of the company
Each round is priced independently and involves a new term sheet specifying the
characteristics of the investment
Post Money
Valuation
=
Pre Money
Valuation
+
Investment
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Why the different stages of financing?
Angel Stage
Price/Share: $1
Price/Share: $2
Valuation: $500k
Pre-Money Valuation: $1mm
Post-Money Valuation: $2.2mm
Investment
# of
Shares
%
Ownership
Founder
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400k
80%
Angel #1
$100,000
100k
20%
Shareholder
Confidential | Ardent Capital
Series A
TOTAL
$100,000
500k
Investment
# of
Shares
%
Ownership
Founder
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400k
36.4%
Angel #1
$200,000
200k
18.2%
VC #1
$1.0mm
500k
45.4%
TOTAL
$1.2mm
1.1mm
Shareholder
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Shareholders’ Agreement
A shareholders’ agreement (or SHA) is an arrangement among the
company's shareholders describing how the company should be
operated and the shareholders' rights and obligations
Confidential | Ardent Capital
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Key provisions include
– Board of Director Composition/ Appointment
– Veto Rights
– Right of First Refusal
– Pre-Emptive Rights
– Drag Along/ Tag Along Rights
– Liquidation Preference & Participation Rights
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Board Composition/ Appointment
Some investors are entitled to representation on the company’s board of
directors
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Confidential | Ardent Capital
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The shareholder agreement sets out the size of the board and the manner in which
board members will be elected
As part of the investment negotiation, an investor can demand the right to appoint a
director to the company’s board
– The investor will have the right to appoint and remove its representation
In addition, an investor may negotiate to appoint an observer to the board
– The observer shall be entitled to attend any Board meeting
– But does not have the same legal responsibility
Typical board composition
– Odd number of members
– Chairman
– Example – two insiders (including CEO), two investors, one independent
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Board structure is critical!
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Veto Rights
Investors can also negotiate specific veto rights so that they have
decision-making over certain issues deemed important to them
Some examples include:
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Decision on Financial Interests/Affairs
– Incurrence of any capital expenditure above a defined amount in a single year
– Any decisions regarding the making of an IPO
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Risk is forcing a sale, or blocking a sale
– The sale, transfer, lease, mortgage, or pledge of any assets of the Company of a
value in excess of a defined amount
– Any change in the nature and/or scope of the of the Company
– Any increase, reduction or alteration to the issued share capital of the Company
– The winding up, dissolution or liquidation of the Company, including any filings in
respect of any of the foregoing
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Decisions on Corporate Governance
– The appointment, remuneration and dismissal of any Director
– The appointment, remuneration and dismissal of the auditors of the Company
– The appointment, and the terms of appointment and dismissal, of any member of
the Management Team and Key Employees (this means YOU!!!)
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Right of First Refusal
The Right of First Refusal is the right to acquire shares before shares
are transferred to a third party
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Confidential | Ardent Capital
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For example, if Shareholder A wishes to sell shares to a third party, but Shareholder
B has the right of first refusal, shareholder B has to right to acquire the shares
before A can transfer shares to the third party.
If B decides to acquire all the shares, then the third party will not even have the
chance to acquire any shares from A
This is to avoid unwanted (from the Shareholder/Investor’s point of view) new
shareholders (eg a competitor) from owning part of the company
Makes negotiating with a new buyer complicated, as they know at the end of it all,
they may still not get their shares
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Pre-Emptive Rights
Pre-Emptive Rights give the existing shareholders the right to acquire
new shares issued by the company
Confidential | Ardent Capital
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For example, if the company decides to issue new shares to potential Series B
investors, Series A investors will have the right to acquire shares up to its pro rata
shareholding
– This helps ensure that Series A investors can prevent its shareholding from
being diluted from future rounds of financing
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Drag Along/Tag Along Rights
Drag Along and Tag Along Rights exist to protect majority and minority
shareholders respectively
Confidential | Ardent Capital
Drag Along Right
• Gives the majority shareholder the right to force other investor(s) to sell his
stake should the majority shareholder exit
• Protects majority shareholders
• Standard terms in a stock purchase agreement
• Typically terminate upon an initial public offering
• Important esp when lots of little shareholders (tracking them down can be
impossible)
Tag Along Right
• Gives the minority shareholder(s) the right to join in the exit should the
majority shareholder sells his stake
• Minority holders have the right to sell their stake at the same terms and
conditions as would apply to the majority shareholder
• Protects minority shareholders
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Liquidation Preference
The liquidation preference determines how the pie is shared in a
liquidity event
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Liquidation Preference specify how money is returned to a particular series of the
company’s stock ahead of other series of stock
Confidential | Ardent Capital
Example
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Liquidation Preference: In the event of any liquidation or winding up of the
Company, the holders of the Series A Preferred shall be entitled to receive in
preference to the holders of the Common Stock a per share amount equal to [x] the
Original Purchase Price plus any declared but unpaid dividends (the Liquidation
Preference)
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In this case, a certain multiple (x) of the original investment per share is returned to
the investor before the common stock receives any consideration
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Participation Rights
Confidential | Ardent Capital
After the payment of the liquidation preference, the next thing to
consider is whether or not the investor shares are participating
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Fully-Participating stock will share in the sale proceeds on a pro rata basis with
common after payment of the liquidation preference
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Capped Participation indicates that the stock will share in the sale proceeds on a
pro rata basis until a certain multiple return is reached
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Non-Participating This liquidation preference is most favorable to the company as
the stock will not share in the sale proceeds beyond the payment of the liquidation
preference
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Liquidation Preferences in Different Scenarios
Depending on the sale price, liquidation preference can lead to
drastically different outcomes for founders
Confidential | Ardent Capital
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Assuming that both classes of preferred (Series A & B) are straight preferred with
no multiple or dividends with Series B senior to the Series A
Shareholder
Common
Shares
Founder
1,000,000
VC # 1
-
VC # 2
-
Series A
Shares
Series A
Cost
Series B
Shares
Series B
Cost
Total
Shares
Total Cost
Ownership
(Fully Diluted)
45.4%
400,000
$1,000,000
200,000
$1,000,000
600,000
$2,000,000
27.3%
600,000
$3,000,000
600,000
$3,000,000
27.3%
Total Shares
Share
Price
Cost
Liquidation
Preference
Ownership %
Series B
800,000
$5.00
$4,000,000
$4,000,000
36.4%
Series A
400,000
$2.50
$1,000,000
$1,000,000
18.2%
Shareholding
Common Shares
1,000,000
Options
TOTAL
45.4%
0%
2,200,000
100%
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Scenario 1: Low Exits
If the sale price is low enough, founders can sell the company and not
get the fully diluted ownership percentage of the proceeds because
some or all of the preferred shareholders will choose to take their
liquidation preference instead of their percentage of the company
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Sale Price = $3.0mm
Proceeds
% of Total Proceeds
% of Pre-Sale
Ownership
Series B
$3,000,000
100.0%
36.4%
Series A
$0
0%
18.2%
Common Shares
$0
0%
45.4%
Confidential | Ardent Capital
Liquidation Preference
% Series B
Total Proceeds
% of Total
Proceeds
% of Pre-Sale
Ownership
VC # 1
25%
$750,000
25%
45.4%
VC # 2
75%
$2.25mm
75%
27.3%
Founder
0%
$0
0%
27.3%
100%
$3.0mm
Shareholder
Total
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Scenario 1: Low Exits
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Sale Price = $5.5mm
Proceeds
% of Total Proceeds
% of Pre-Sale
Ownership
Series B
$4,000,000
72.7%
36.4%
Series A
$1,000,000
18.2%
18.2%
Residual for Common Shares
$500,000
9.1%
45.4%
TOTAL
$5.5mm
Liquidation Preference
% Series
B
Series B
Proceeds
% Series
A
Series A
Proceeds
%
Common
Shares
Common
Share
Proceeds
Total
Proceeds
% of
Total
Proceeds
% of PreSale
Ownership
VC # 1
25%
$1mm
100%
$1mm
0%
$0
$2mm
36.4%
27.3%
VC # 2
75%
$3mm
0%
$0
0%
$0
$3mm
54.5%
27.3%
Founder
0%
$0
0%
$0
100%
$500,000
$500,000
9.1%
45.4%
$500,000
$5.5mm
Confidential | Ardent Capital
Shareholder
Total
$4.0mm
$1.0mm
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Scenario 2: High Exits
In the case of a high exit, preferred shareholders may choose to not
exercise their liquidity preference and instead take their percentage of
the company
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Sale Price = $22mm
Sale Price Per Fully Diluted Share = $10.00
Shareholdings
Proceeds
% of Total Proceeds
% Pre-Sale Ownership
Series B
$8,008,000
36.4%
36.4%
Series A
$4,004,000
18.2%
18.2%
Common Shares
$9,988,000
45.4%
45.4%
Confidential | Ardent Capital
TOTAL
$22mm
%
Series
B
Series B
Proceeds
%
Series
A
Series A
Proceeds
%
Common
Shares
Common
Share
Proceeds
Total
Proceeds
% of
Total
Proceeds
% Pre-Sale
Ownership
VC # 1
25%
$2,002,000
100%
$4,004,000
0%
$0
$6,006,000
27.3%
27.3%
VC # 2
75%
$6,006,000
0%
$0
0%
$0
$6,006,000
27.3%
27.3%
Founder
0%
$0
0%
$0
100%
$9,988,000
$9,988,000
45.4%
45.4%
$9,988,000
$22mm
Shareholder
Total
$8,008,000
$4,004,000
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Scenario 3: High Exits with Participation
In the case of a high exit with both liquidation preference and full
participation, the preferred shareholders get to “double dip” in the total
proceeds
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Sale Price = $22mm
Sale Price Per Fully Diluted Share = $10.00
Liquidation
Preference
Participation
Participation
Proceeds
Total Proceeds
% Total
Proceeds
% Pre-Sale
Ownership
Series B
$4mm
36.4%
$6,188,000
$10,188,000
46.3%
36.4%
Series
• Ac
$1mm
18.2%
$3,094,000
$4,094,000
18.6%
18.2%
$0
45.4%
$7,718,000
$7,718,000
35.1%
45.4%
$17mm
$22mm
Shareholdings
Common Shares
Confidential | Ardent Capital
TOTAL
$5mm
Shareholder
%
Series
B
Liquid
Pref
Series B
Participation
Proceeds
%
Series
A
Liquid
Pref
Series A
Proceeds
%
Common
Shares
Common
Share
Proceeds
Total
Proceeds
% of
Total
Proceeds
% PreSale
Ownership
VC # 1
25%
$1mm
$1.547mm
100%
$1mm
$3.094mm
0%
$0
$6.641mm
30.2%
27.3%
VC # 2
75%
$3mm
$4.641mm
0%
$0
$0
0%
$0
$7.641mm
34.7%
27.3%
Founder
0%
$0
$0
0%
$0
$0
100%
$7.718mm
$7.718mm
35.1%
45.4%
$4mm
$6.188
$1mm
$3.094mm
$7.718mm
$22mm
Total
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Start Up Funding Landscape
Idea Stage
Confidential | Ardent Capital
Angels
Friends & Family
Incubators
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JFDI
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FF&F
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Self fund
Early Stage
(Series A)
Seed Stage
Seed Funds
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Ardent Capital
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Golden Gate
Ventures
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Jungle Ventures
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Crystal Horse
NRF
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15% invested by
qualified VCs and
85% Follow Up by
NRF
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CyberAgent
SingTel Innov8
Recruit
Rakuten
Gree
Growth/
Late Stage
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SingTel
Tiger Global
Sequoia
Macquarie
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NRF Funding in Singapore
Very big positives and negatives
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Positives
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Confidential | Ardent Capital
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$500K of funding
Relatively easy and fast
Lots of NRF funds operating in Singapore
Provide incubation support at low cost
Good valuations
Negatives
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Must do everything in SG – Incorporate, IP, books in SG$
Key execs must be in SG
Small market
Expensive staff costs
For a Thai team:
• Away from your home base, home team, home customers
• Insufficient follow on funding – Series A crunch
• Lots of competition
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THANK YOU
Confidential | Ardent Capital
[email protected]